Lawmakers battle over best way to help small businesses

House members eye allocating $30 billion to Small Business Administration

By

RonaldD. Orol

Updating to correct the spelling of Steve Gordon's name.

WASHINGTON (MarketWatch) --House members clashed Friday over whether Congress should use $30 billion from a bank bailout program to help small banks assist small businesses or allocate it to the Small Business Administration to make loans.

Arguing that small businesses continue to face major challenges obtaining credit, Herbert Allison, assistant Treasury Secretary for financial stability, made the case for allocating the funds to small banks to loan to small businesses, based on an Obama administration proposal made earlier this month.

"The proposed design of this new program would provide a clear economic incentive for smaller banks to increase small business lending," Allison said in testimony to a joint congressional committee.

"Why give money to banks when they've proven they aren't going to lend?"
Steve Gordon, president of Instant-Off

The House Financial Services and Small Business committees held a joint hearing to examine major challenges in small business and commercial real-estate lending in local markets.

The hearing came after the Federal Deposit Insurance Corp. on Tuesday reported that lending by the banking industry fell by $587 billion in 2009, the largest decline since the 1940s.

The White House proposal, which would assist banks with less than $10 billion in assets make loans to small businesses, requires congressional approval.

Members of both committees are also considering allocating the $30 billion s to the Small Business Administration. That proposal was made by Margot Dorfman, U.S. Women's Chamber of Commerce chief executive, and Steve Gordon, president of Instant-Off Inc., a Florida-based company that makes water-saving devices for faucets.

The SBA would need to make the small business loan proposals it receives available for small banks to take first, before it lends it, as part of the proposal.

"Why not just take that $30 billion and put it in a government account? Why give money to banks when they've proven they aren't going to lend?" asked Gordon. "Banks just don't understand lending."

Taxpayers on the hook again?

The proposal was looked at skeptically by Republican committee members, who argued that the real solution was to bring regulatory clarity to small banks and small businesses.

Rep. Spencer Bachus, R-Ala., the top Republican member of the House Financial Services Committee, expressed skepticism about the proposal, arguing that taxpayers would be on the hook if the SBA loan fails.

"Who absorbs if loans fail? Taxpayers," Bachus said.

But House Small Business Committee Chairman Nydia Velazquez, D-N.Y., said lawmakers should consider allocating the funds to the Small Business Administration because of the emergency situation of small business lending in the U.S.

"It's a temporary fix and it will not compete with private market," Velazquez said. "It will make the loans like the SBA has done every time there is a natural disaster in this country. Once we get out of this recession, it will end."

Paul Merski, chief economist at the Independent Community Bankers of America, said the SBA doesn't have the loan officers or scale to do the underwriting for small business loans on the scale that would be needed when $30 billion in funds become available.

"I believe that Chairwoman Velazquez's intentions are good, and you could have a debate about what the most efficient way of getting that out to small businesses," Merski said. "Taking advantage of the loan officers of the 8,200 commercial banks out there would be the most advantageous way of spending the funds."

He added that with bank regulators demanding higher capital levels, the funds could help many community banks raise the capital they need to lend more. He said the $30 billion in capital could be converted into $300 billion of lending because community banks could leverage the funds eight or 10 times.

The White House proposal

Alternatively, the Obama administration proposal would allow banks with $1 billion or less in assets to borrow from the government up to 5% of their risk-weighted assets (Banks with between $1 billion and $10 billion could borrow 3%). The smaller financial institutions would receive investments from the financial rescue Troubled Asset Relief Program that must be used for small business lending. However, the measure needs approval from Congress to be put into effect.

Based on the program, a bank with $100 million in assets could borrow $5 million in funds from the government while an institution with $1 billion in assets could take on $50 million to fund small business loans.

The TARP investment would come with a 5% dividend to Treasury, which could be reduced by 1% -- to as low as 1% -- for each 2.5% increase in small business lending conducted by the bank. Community banks that have already accepted TARP funds - as roughly 500 have - could convert.

As an additional incentive, the Obama proposal would eliminate the executive compensation restrictions and costly warrants that came attached to the original TARP program.

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